New year, same growth story: Consumers are driving U.S. economy

Retail sales rose 0.4 percent, exceeding expectations, Commerce Department data showed. Excluding a slowdown at car dealers, the gain at retailers was even more impressive — up 0.8 percent, the most in four months. Apparel stores showed the largest jump in receipts since February of last year.

Photo: Michael Brian /Associated Press

Busy storefronts and an inflation pickup show the world’s largest economy is starting 2017 much the same way it ended 2016: driven by the consumer.

Retail sales rose more than forecast in January in a broad-based advance, and consumer prices climbed by the most in almost four years, government figures showed Wednesday. Compared with a year earlier, purchases climbed by the most since March 2012. Even factory output increased for the fourth time in five months, the Federal Reserve reported.

The data, backed by a jump in consumer and business sentiment since President Donald Trump’s election victory, indicate growth this quarter will get a boost from household spending, which accounts for about 70 percent of the economy.

Rising demand and a recovery in commodity prices are also pushing inflation higher. Traders moved closer to placing a 50 percent probability on a March increase in borrowing costs by the Fed following the latest consumer price data.

“The economy is still chugging along,” said Scott Brown, St. Petersburg, Florida-based chief economist for Raymond James Financial Inc. “Consumer spending is still pretty healthy. Inflation is getting closer to the Fed’s goal. This is a green light for the Fed to raise rates in coming months.”

One caveat: Inflation is eating into consumers’ wallets and could curb spending appetites. A separate report from the Labor Department showed hourly earnings adjusted for inflation fell 0.5 percent in January from the prior month, the biggest drop since August 2012, and were unchanged over the past 12 months.

Americans nevertheless found the money for purchases last month. Retail sales rose 0.4 percent, exceeding the median estimate of economists for a 0.1 percent rise, Commerce Department data showed. Excluding a slowdown at car dealers, the gain at retailers was even more impressive — up 0.8 percent, the most in four months.

Purchases of electronics and appliances climbed the most since June 2015, sporting goods sales had the biggest advance since July 2015, and apparel stores showed the largest jump in receipts since February of last year.

Car purchases were the only major weak spot, consistent with industry results released earlier this month. Automobile dealers’ sales fell 1.4 percent in January after a 3.2 percent surge the previous month, the Commerce Department reported.

The inflation data suggest price gains are getting closer to the Fed’s goal. The consumer price index rose a larger-than-forecast 0.6 percent from the previous month, the most since February 2013, after a 0.3 percent gain in December, Labor Department figures showed. A 7.8 percent jump in the cost of gasoline accounted for about half of the January increase.

Compared with the same month last year, costs paid by Americans for goods and services rose 2.5 percent, the most since March 2012.

The Fed targets 2 percent annual gains in a separate gauge, the personal consumption expenditures price index, which rose 1.6 percent in December from a year earlier.

In addition to higher gasoline costs, clothing prices jumped by the most since February 2009, with men’s apparel surging by the most on record. New-vehicle prices had the biggest advance since November 2009.

The core CPI measure, which excludes volatile food and fuel costs, rose 0.3 percent, more than projected and the most in five months. Core prices were up 2.3 percent from January 2016.

A March interest rate increase by the Federal Open Market Committee, an unlikely scenario just days ago, may be increasingly on the table.

“At our upcoming meetings, the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen told the Senate Banking Committee on Tuesday.

A gradual recovery in manufacturing is also underway. Production at factories, which make up about 80 percent of all industrial output, increased 0.2 percent for a second month in January, according to Fed data.

“It looks like the economy is continuing to rip in the first quarter,” said Ward McCarthy, chief financial economist for Jefferies in New York. “Consumers continue to spend and are buying virtually everything. Inflation is accelerating. This opens the door for the Fed to raise rates in March.”